The results of the third quarter performance of government and public sector banks are a great shock to the investors in these and to the millions of investors in the stock market. For a week, the results announced for the third quarter have been a continuous dirge story.

The results of the third quarter performance of government and public sector banks are a great shock to the investors in these and to the millions of investors in the stock market. For a week, the results announced for the third quarter have been a continuous dirge story. First, we had the results of three public sector banks – Central Bank of India, Allahabad Bank and Dena Bank that reported losses of Rs 836.62 crore, Rs 486.14 crore and Rs 662.85 crore respectively. Then came the bombshell from State Bank of India, the country’s largest lender, reporting a 61.7 per cent drop in net profit to Rs 1115 crore from Rs 2910 crore in the previous year’s corresponding figures. This resulted in the sensex plunging by a 21-month figure of 807.07 points. Later we had the normally considered healthy leader, Bank of Baroda, reporting a loss of Rs 3342 crore, the highest ever quarterly loss posted by any public sector bank in the industry, thanks to a provisioning of a whopping Rs 6474 crore compared to the Rs 1149 crore it provisioned in the previous quarter. The gross NPA was shown as Rs 38,934 crore (9.68 per cent) and net NPA Rs 21,806 crore ie. 70 per cent rise.

Breaking the convention, the NDA II government drafted bank managers from the private sector to head public sector banks. P S Jayakumar, the new chief executive officer of Bank of Baroda, drafted from Citibank, was not weighed down by the baggage and came out boldly with such hefty provisioning.

It is surprising the regulator Reserve Bank of India with its vast army of experts and auditors could not detect the mounting NPAs and deploy timely corrections.

IE has been pointing to the gay abandon with which bank chairmen of several public sector banks were lending. We had pointed to Indian Overseas Bank as an instance of such profligacy. Then CMD, M Narendra was enjoying a field day getting kudos for such largesse from industry associations. He was cleverly hedging his bets by having gala functions year after year presenting high ups at the policy level from Finance Minister P Chidambaram to Minister of State for Finance, Namo Narain Meena to Rerseve Bank of India Governor, Deputy Governor, et al.

PSBs have seen a surge in their bad loans following directions from the RBI to classify some large corporate accounts as bad debts. Banks have been avoiding to classify these as NPAs, as it would hurt their bottomline. SBI’s provisions for bad loans soared 59 per cent to Rs 7645 crore.

A staggering Rs 52,542 crore of bad loans have been waived off by PSBs, a 52.6 per cent increase over the previous fiscal. Public sector banks indulged in massive settlements in which unrecoverable loans were settled at huge discounts. These are attributed to pressures from politically powerful personalities, eg. a Rs 10 crore outstanding loan was settled for around Rs 3 crore with suggestions of liberal kick backs from a political intermediary. Such bad management resulted in inevitable low valuation of the banks’ stocks. More importantly, this also necessitated banks repeatedly requiring budget support for increasing their capital resulting in humongous strain on the budget. This was in contrast to private banks including the large HDFC, ICICI and Axis Bank and smaller ones like City Union Bank, Karur Vysya Bank, Lakshmi Vilas Bank... showing healthy balance sheets.

Therefore, the urgent need is for bold reform of the banking sector. Union Finance Minister Arun Jaitley announced at the CNN Asia Business Forum 2016 at the Make in India week in Mumbai on 14 February his plans to go for a series of banking reforms. There is the hint of the government reducing its holdings in PSBs to 51 per cent.

Such a step would bring in twin advantages: it will make the banks more accountable to the shareholder and secondly force these to earn profits and relieve the government the burden to capitalise these frequently. Such a step will also pave the way for more mergers and acquisitions.

Of course, the task is not easy. Bank employees’ unions are strong and have resisted successfully such major reforms.

IE, the business magazine from south was launched in 1968 and pioneered business journalism in south. Through the 45 years IE has been focusing on well-presented and well-researched articles. When giants in the industry stumbled to keep pace with the digital revolution, IE stayed affixed embracing technology.